Air Pollution

Allowance Trading Offers an Opportunity to Reduce Emissions at Less Cost Gao ID: RCED-95-30 December 16, 1994

In 1990, Congress adopted a new regulatory approach to reduce acid rain, allowing electric utilities to trade allowances to emit sulfur dioxide, a major cause of acid rain. Utilities that reduce their emissions below their required levels can sell their extra allowances to other utilities to help them meet their requirements. The Environmental Protection Agency estimates that this flexible approach to curbing acid rain could reduce costs significantly because trading allowances can be less costly than other methods of controlling pollution. This report discusses the (1) extent to which trading is expected to cut sulfur dioxide emissions and compliance costs, and the status of the allowance trading market; (2) impediments to increased trading of allowances; and (3) implications of designing a similar approach to curb carbon dioxide emissions.

GAO found that: (1) sulfur dioxide emissions and compliance costs are decreasing despite the low level of allowance trading between utilities; (2) although they could save more by purchasing emission allowances, most utilities are choosing relatively cheap in-plant reduction methods to reduce their emissions below Phase 1 requirements and saving their excess allowances to meet the stricter Phase 2 requirements; (3) the utilities' flexibility in choosing their emission reduction methods has reduced the prices of competing options; (4) utilities have purchased most of their trading allowances through two EPA-sponsored auctions; (5) allowance trading has been limited mainly by the slow phase-in of mandated emission reductions, economic regulation of the electric power industry, uncertain tax treatment of allowances, and confusion over the EPA allowance auction; (6) sulfur dioxide program features that would be helpful in designing a carbon dioxide emissions program include an overall requirement for emissions reductions and a monitoring system to ensure compliance; and (7) modifications that may increase allowance trading in a carbon dioxide program include requiring utilities to achieve the same emissions reductions simultaneously and designing an auction that results in a single price for allowances.


Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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